SCSS

Select Comfort Corporation (SCSS)

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Industry: Consumer Durables
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Select Comfort (SCSS)

Q1 2011 Earnings Call

April 20, 2011 5:00 pm ET

Executives

William McLaughlin - Chief Executive Officer, President and Executive Director

Mark Kimball - Chief Administrative Officer, Senior Vice President of Legal, Secretary and General Counsel

James Raabe - Chief Financial Officer and Senior Vice President

Analysts

John Baugh

Andy White - Longbow Research

Budd Bugatch - Raymond James & Associates, Inc.

Bradley Thomas - KeyBanc Capital Markets Inc.

Presentation

Operator

Good afternoon. Welcome to Select Comfort's First Quarter 2011 Earnings Conference Call. [Operator Instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

Mark Kimball

Thank you, Angie. Good afternoon, and welcome to the Select Comfort Corporation First Quarter 2011 Earnings Conference Call. Thank you for joining us. I'm Mark Kimball, Senior Vice President and General Counsel. With me on the call today are Bill McLaughlin, our President and Chief Executive Officer; Jim Raabe, our Senior Vice President and Chief Financial Officer; and Hunter Saklad, Vice President of Finance.

In a moment, I’ll turn the call over to Bill. Following our prepared remarks, we will open the call to your questions. Please be advised, this telephone conference is being recorded and will be available by telephone replay. It also will be archived on our website at selectcomfort.com. Please refer to the details set forth in our news release to access the replay on our website. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures included in our release or that may be discussed on the call.

The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings release and discussed in some detail in our Annual Report on Form 10-K and other periodic filings with the SEC. The company’s actual future results may vary materially.

I will now turn the call over to Bill for his comments.

William McLaughlin

Thanks, Mark, and thank you for joining us to discuss Select Comfort's first quarter performance and to update our outlook for the balance of the year. Select Comfort is demonstrating that it is solidly positioned to continue to grow. Our first quarter not only confirms our formula for sustained revenue growth but also provides important insight into the leverage potential of our unique business model when you layer on incremental sales.

During the quarter, the company demonstrated that potential, which resulted in the following accomplishments. First quarter, we achieved a 22% increase in revenue versus a strong prior year period, and company-owned comparable sales were up 26%.

Second, we earned record-setting operating profit and margin performance on revenue that was below our historic first quarter high point. Operating income increased 86% versus prior year, and operating profit margin in the quarter was more than 13%, which is an important step towards our goal of full year margin performance of 12% or better within the next few years.

And third, we significantly grew cash and increased the strength of our balance sheet. Our advantage business model leverages growth for significant cash generation, and we've now grown our cash balance to more than $100 million and remained debt-free.

Our performance in the quarter clearly demonstrates the power and potential of our strategies. And it starts with top line growth, which means more traffic and a higher transaction size. Our first priority involves increasing consumer awareness and consideration of the Sleep Number brand. To achieve this awareness and consideration, we increased our media investment by 30% in the quarter.

Also, our sales, marketing and product teams continue to refine their sales, promotion and merchandising formulas, balancing brand development with urgency around consumer shopping periods. The rate of growth in the quarter was exceptional as the teams responded to the challenge to make Presidents' Day as important to the first quarter as Labor Day is to the third quarter. This unique opportunity to capitalize on a previously underdeveloped event contributed as much as 4 points of our growth in the quarter. We also have been positioning our company to accelerate earnings faster than revenue growth through leverage in margin expansion, particularly in selling.

We continue to adjust our store base, closing stores to reduce overlap in trade areas and repositioning for upgrading locations to support our long-term objectives. As of the end of the quarter, average sales per store topped $1.4 million annually, up 26% versus prior year. And we are well on our way to exceeding our historic average sales per store of $1.5 million, with the next goal of being sales per store of $2 million and beyond.

And the result of our increased growth and leverage is the ability to allocate more resources against important expansion opportunities. In the quarter, we continued investing in the advancement of advertising, digital marketing, new store formats and local market development.

In that vein, I promised during the last earnings call that we'd discuss in more detail 2 important initiatives: our evolving marketing efforts and retail strategy. Both programs are squarely focused on increasing consumer awareness and consideration of the Sleep Number brand, products and exclusive selling channels, particularly our stores.

Let's start with marketing, specifically, our TV advertising. Awareness of the Sleep Number brand is about 75% lower than that of the leading inner springs. And more importantly, awareness of our stores is significantly lower still. Therefore, increasing the effectiveness of our advertising to raise awareness is a key driver of accelerating profitable growth.

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